Brokerage Plagued By Leaks

January 22, 1993|The New York Times

Brokerage firms try hard to guard against the leaking of information about coming stock picks. But trading on such leaks, known as ``front running`` in the securities business, appears to be a recurring problem at Raymond James & Associates, a high-profile and flourishing regional brokerage firm, according to internal company memorandums.

Front running is harmful to investors because it allows a select group of traders to exploit news that could lift or depress the price of a stock.

It would violate Securities and Exchange Commission disclosure rules if the trading took place in accounts of Raymond James` customers or employees, and it would violate federal insider-trading laws if the leaks made their way to stock investors who trade outside the firm.

While the St. Petersburg brokerage house says it has investigated run-ups in stock prices or trading volume that occurred before its stock picks were publicly released, it has been unable to explain the leaks or the sources of the market reaction.

A favorite firm of small retail investors, Raymond James is run by Thomas A. James, who served as chairman of the Securities Industry Association last year.

The firm has become a darling of investors and of the financial press. Publicly traded shares of the company have risen 69 percent since Oct. 9, and Raymond James` winning stock picks have landed it the top position in a periodic Wall Street Journal ranking of brokerage firm recommendations.

Florida Trend magazine called Raymond James ``Florida`s best-managed company`` in August 1991. The company raised its quarterly dividend 33 percent, to eight cents a share, on Dec. 18.

While front running is suspected to be somewhat common on Wall Street, it is difficult to prove. Because so many factors can influence a stock`s price, including news events, analysts` reports and the general state of the stock market, regulators are frequently frustrated in trying to bring front-running cases.

Furthermore, some brokerage firms say they might themselves contribute to increases in volume in advance of a recommendation. That is because they must often accumulate an inventory of shares, particularly in advance of small- stock recommendations, so that they can meet investors` demand.

At Raymond James, front running has been of concern of top executives for months. In a Nov. 5 memo to analysts and top management of the firm, Dave Henwood, director of research, said Raymond James had a reputation in the past among customers, ``whether deserved or not,`` for ``routine`` front running.

The company`s institutional sales force, the memo said, had been embarrassed about promoting certain stocks that had behaved ``as if the idea had been leaked several days in advance.